A Market Order Gives You Speed, But Lacks Control
A market order is very simple, and gets executed almost immediately. But is it right for your next trade?
Technically speaking, it is an instruction to your broker to trade at the best price currently available in the market. But as you're about to discover, the best price currently available is not always the price that you see when you enter your trade.
Why would you place a market order?
You use a market order when you want to be absolutely sure your trade will be completed (i.e. executed, filled, etc.). You want to trade NOW, and are not focused on buying or selling at a specific price. So the key advantage is speed of execution.
There is a downside, called "paying the bid/ask spread". Suppose you want to trade shares of Apple stock (AAPL), and you want to trade NOW. When you log into your trading account, you see that the current bid/ask prices are 607.20 and 607.40, respectively.
If you buy using a market order, you will pay $607.40. Now, if you tried to sell your shares immediately after buying them (assuming the bid/ask prices are unchanged), you would get paid $607.20.
In exchange for the ability to execute your orders immediately, you paid 0.20.
From a safe investing perspective, you would use this order type for investments with really high trading volumes, and really small bid/ask spreads.
Factors affecting Market Orders
The size of your order is a major factor affecting market orders, because of something called market impact
. Market impact occurs when you trade enough shares in one order to "move" the market price up or down.
As the size of your trade grows (in terms of numbers of shares), it becomes more and more difficult to find a single person that wants to trade. Usually, large market orders are split into smaller pieces.
For example, if you tried to sell 100,000 shares of AAPL, your trade might be split into two 50,000 "chunks". Or, you might need several trades of different sizes (1 for 50,000, 1 for 20,000, 1 for 10,000, 3 for 15,000, and 5 for 1,000).
At first, this difference does not seem like a big deal. However, each trade is at a different price. So the "market" price used for the first 50,000 "chunk" (the price you saw when you entered the order) may be much different than the "market price" you get for the last 1,000 share chunk.
How to place a market order
Returning to our earlier example, take a look at the screenshot below from TD Ameritrade:
If you place a buy order, you will buy shares at $607.40. If you place a sell order, you will sell shares at $607.20.